Bad medicine

The (welcome?) injection of liquidity to lending banks will go a little way to restoring confidence and stability to the money markets, but I wonder if this is a very expensive panacea to the ills of western economies. The underlying causes of the credit crunch are still there. There are billions of people world wide struggling to repay mortgages on homes bought while the housing boom was in full swing, billions of people struggling to finance loans given by banks who dealt them out like candy over the counter, billions of small and medium sized businesses struggling with interest payments on capital raised during the good years before the bubble burst, these are the very people (essentially you and I) who were the root cause of the “credit crunch”. Those who had debts higher than the capital value of their assets and caused liquidity problems for the banks initially, and as property prices continue to fall that situation is only eased a little after yesterday’s world wide interest rate cuts.

The underlying causes of poor liquidity still remained stubborn and untouched by political hands. As I opined in a previous post, governments have a fair amount of blame to shoulder themselves, on top of the irresponsible banking procedures which allowed traders to continue to loan way past the capitalisation limits previously accepted against poor security. By running up huge budget deficits, western governments have over stretched money markets with their massive need for loans and depressed debtors ability to repay loans with high rates of personal and corporate taxation.

Yet, as we follow the Americans by finding vast caches of cash from somewhere to prop up the banks, not a single politician appears able to see that little or nothing has been done to cure the causes of “credit crunch”. Alernatives not looked at include massive reductions in corporate taxes, massive reductions in personal taxes. massive reductions in public spending, and massive reductions in public borrowing (indeed governments are probably borrowing more than ever.) The deal struck by Brown and Darling will take decades to be paid back and is already risking each and every tax payer in this country about £10,000, our collective ability to repay our debts is not being addressed.

I fear that these very expensive measures may end up as little more than a sticking plaster when major surgery is more appropriate. We need to be putting money back into the pockets of people at the bottom of the pile if banks are ever to be able to raise capital, and our economies begin to claw their way out of the recession, a recession which too many politicians are not prepared to accept is happening. It is here, it is real, it is happening, and it won’t go away on it’s own. To get economies moving from the “bottom point” (when it comes) requires debts to be repaid around the world, and ordinary people to have sufficient money from their labours to create the slow controlled post debt growth that will start the next boom.

A recession is the market’s way of telling us that things have gone wrong, some sectors of the economy have overheated at an uneven rate, it is the natural pressure release valve that provides self regulation, but it is a painful medicine, of that there is no doubt. But we cannot shirk away from the pain.

If government intervention is required in any way when administering the medecine, it is to make our recovery easier to bear, to trim the fat and excess from the money markets, to trim the fat and excess from government, to spend less, tax less, and allow our citizens to earn more.

The one major factor distorting the “credit crunch” is the ability of governments to see what their own interference in the markets is achieving, and the more they borrow to throw back at banks, the more the distortions perpetuate. Governments must get out of the money markets to allow a natural building of liquidity and put up with the pain that will be caused. Their actions may only be putting off what will arrive in any case.

Sound money is not dispensed with a sugar coating!

The bi partisan approach

So politicians in the USA seemed fairly clueless as to how they should address these mighty issues in an election year, so looking as though they are floundering about like dabs out of water they found it far easier to adopt the “we’re in this mess together” act, and call a truce. In reality neither McCain nor Obama had any ideas that might be radically different to Paulson’s, so they quietly acquiesced to government intervention, fearful of being seen as economic and idealogical dunces by the electorate. The same pattern happened over here with Cameron and Clegg seemingly devoid of alternative policies in a “national crisis” which required that they gave the government all party support. Rather than looking like “we are all in this together” it is starting to feel as though the politicians are telling us “it’s nothing to do with us guv!”

“This came from a fundamental failure in the US banking system … but there have been abuses in our system too”

See, nothing to do with politicians at all!

“Our economy is built around people who work hard, who show effort, who take responsible decisions, and where there is excessive and irresponsible risk-taking that has got to be punished.”

No it isn’t, it’s built on excessive credit and debt, that’s why we are in the shit, and governments are amongst the biggest borrowers on the planet.

None of them, on either side of the Atlantic want to own up to the responsibilities of government and public policy, rather blame the banks, the markets, the traders, and the derivative dealers, without a thought about how much governments have borrowed from the markets. By doing so they have tied their hands behind their backs and given themselves no room for manoeuvre, making no case for alternative policies and forgetting all about the people with the real “credit crunch” problems – the tax payers!

In Cameron’s case his strategy has handed the initiative straight back to the government, and the inability to even talk about a low tax, low spend alternative has made him and Osborne look lightweight, yet even if the Conservatives win the next election they now know for certain that any economic plans they already had, are now dead in the water, having tied himself to Labour’s policies.

9 Responses

Your analysis is only partial. The US has a massive structural flaw in the banking system, which hyperventilated and led to the housing crisis and then to meltdown. The UK has had a lesser housing problem, and fewer problems with banks (excepting Northern Bank and all the recent crash-and-burn). Many countries were pottering along with just a recession to deal with. You can’t extend the US problems across the globe to billions, as the world had different problems which are all now compounded by the meltdown in the finance sector.

There was a greater separation between private and investment banking in most other countries, and that trend will increase.

The thing I don’t hear people talking about is the changes that this crisis will bring, with people shunning the US as an investment vehicle. How will the capital markets change, now that many of the major banks have changed hands? Rather like the former diamond capital Antwerp that has gradually lost its centuries-old pre-eminent role, I can only see the centre of financial gravity swinging eastwards.

Nothing is set in stone. I don’t see people coming back to Wall St and saying, “Glad that little spot of bother is over. Here’s more of my money”. Would you?

All of the misbegotten credit was just a way of papering over economic discrepancies between those who work for a living (shopworkers, teachers, decorators, etc) and those who make money by manipulating the earnings of others (bankers, politicians, giant businesses). Since it’s verboten to think about pay rises for the working classes (teachers, police, nurses), the question of maintaining adequate living standards has been addressed through the smoke and mirrors of credit; the question of social welfare was slipped under the rug. The welfare state wasn’t dismantled so much as it was reformulated so that it appealed to economic quasi-Darwinists. Blair and Brown played to this audience by pretending to support social equality while hiding the mechanism amid neoliberal rhetoric. They handed over social welfare and social responsibility to the loan-makers in the guise of broadening access to credit, free markets and so on. In promoting this ruse they make Thatcher look like an honest broker.

So go ahead and fault the borrowers for making ends meet by whatever means possible. But your focus on the bankers, politicians and borrowers conveniently sidesteps the fact that wages have been artificially low for some time, and that many key workers have no prospect of stable economic or social conditions. People are living on credit because their costs have gone up while their wages have remained fixed. They are not choosing to borrow while holding savings in reserve. They haven’t got savings. They might be accused of failing to save, but you cannot expect them to give up home, kids, car, insurance, and the broader commitments of modern life.

If the credit and banking crises spell the end of these hidden neoliberal welfare schemes, likely prospects for their replacement include sharp rises in state-supported welfare, in wage demands, more fluctuations in the housing market, and a working population increasingly desperate for solutions to their own economic hardships. In other words, set your calendar back a couple of decades and think about what might have been done differently so that the working poor had a better deal.